Your Retirement Center

Early Retirement

Retirements aren't only lasting longer. They're starting earlier.
When you think retirement, you may think 65. Since the 1930s, when Social Security was introduced and employee pensions became increasingly common, that's been the traditional retirement age. At 65, you're eligible for Medicare, which was designed to provide health care coverage for retired people. And 65 is when you get a small break on your taxes by being eligible to take a slightly larger personal deduction.

Despite the pull of tradition, many people follow their own schedule and retire either earlier or later than what Social Security calls full retirement age. You may do that as well. But you should take some time to think what your decision could mean to your financial security.

Retirement age
  • Less time in pension plan, and so potentially smaller payments
  • Smaller Social Security benefits
  • Less in personal investments in either tax-deferred or taxable accounts
traditional retirement age
  • More time in your company pension plan
  • Qualify for the maximum possible Social Security benefit
  • Have more time to make personal investments

THE EFFECT, IN $s and ¢s

Financially speaking, the biggest downside of retiring early is having less income. The most obvious reason is that you're not working. But retiring early can also mean a reduction in the retirement income on which you were planning.

RETIRED BUT WORKING People who retire before age 65 tend to continue to work in increasing numbers. One reason seems to be that while you can get your pension and Social Security benefits early, you aren't eligible for Medicare until you reach 65. Plus, many employers have been reducing healthcare coverage for retired workers, prompting the need to earn additional income to cover insurance costs. What's more, people whose retirement savings have not provided the return they expected may not have enough left to live as they had planned. And, of course, some people find work stimulating and enjoyable.
To begin with, you'll accumulate fewer years of contributions to your retirement plan. Since you typically earn the highest salary at the end of your career, retiring early may mean losing contributions based on those amounts. The consequence is usually a smaller pension check than you might have received had you stayed longer. If all or part of your pension comes from a traditional plan, the amount may also be reduced to offset the greater number of years you are expected to collect - though that policy isn't the same with every employer. Sometimes a pension is based on your salary and the number of years you've worked rather than your age when you retire. In other cases, you can retire with full benefits at age 55. If you apply for Social Security at 62, the first year you're eligible, you'll receive a smaller benefit each year for life than if you begin collecting at the full retirement age. People born before 1938, for example, collected 80% of what they would have been eligible for had they started benefits at age 65. But people born in 1938 or later are eligible for a smaller percentage at age 62 because the age at which full benefits are paid has increased (It was 66 for people born in 1943 to 1954, and is increasing gradually to 67 for people born in 1960 and later). You can find the specific percentage you'd qualify for, based on the year you were born, on the Social Security website,


Choosing to retire early can also have an impact on your investments. You'll have to stop adding assets to certain tax-deferred accounts when you're no longer earning a salary. You may have less money to invest in the ones that don't have contribution restrictions. And if you start drawing retirement income from your accounts, they will have less time to grow undisturbed.

One solution is to continue to invest even after you're eligible to withdraw or actually begin withdrawing. You can reinvest your earnings in individual securities or purchase a variable annuity , also referred to as a flexible premium annuity. And, if it's financially possible, you can postpone withdrawals from tax-deferred plans. With a traditional IRA, for example, you can wait until you are 72, and with a Roth IRA there's no required beginning date.

CALLING IT QUITS While one of the attractions of early retirement is more time to do the things you enjoy - and maybe less time at a job you've grown tired of - there are other reasons for retiring early. One is being downsized. Older and more highly paid employees may have little choice about early retirement if their employers insist. In that case, having additional sources of long-term income may be crucial. If you are offered an incentive to retire early, you'll want to weigh the benefits of the package that's offered.

NEEDING IT LONGER The other side of retiring early is being retired longer. That means you'll need retirement income for more years. To take a simple example, if you retire at age 60 instead of 65, and need an income of $40,000 a year to live comfortably, you'll increase the amount you need in retirement income resources by $200,000 even before accounting for the impact of inflation .
Income you need
Additional retirement years
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Add to resources

What's more, retiring early often means you start withdrawing money from your retirement accounts sooner, reducing the base on which they can grow. That means you need a larger nest egg if you want to ensure your income will last as long as you need it.


If you're offered a choice of early retirement packages, here are some questions to ask:

  • Will the base on which my traditional pension is figured be increased? By how much?
  • Will the offer increase the percentage of my salary that's being replaced?
  • If I take a lump sum , is that on top of my regular pension or instead of it?

Your Planning Tools

You can wait until you are age 72 to make withdrawals from a Traditional IRA .

FPAs are generally available to anyone at any time, regardless of employment status.

Interactive Demo
Use our interactive demo to learn why asset allocation is an essential investing strategy in planning for retirement.

Thinking about early retirement? Consider placing your pension or retirement plan savings into a rollover IRA and continue to defer income taxes on the rollover amount.

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Your Retirement Center